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Equity Research: PB Fintech Ltd
PolicyBazaar has a good upside potential of 35% from its current price along with growing CAGR.
Policybazaar is a unique model in the highly competitive fintech space with an established strong market position that is unlikely to be challenged. We find listed parallels in digital consumer space (Nykaa in beauty, Myntra in fashion, Amazon and Flipkart in overall commerce, etc.) but no player as dominant in any fintech micro-segments as Policybazaar in insurance marketplace. Low entry barriers ail the fintech space in general, Policybazaar had an early-mover advantage to capture mind and market share. Payment or financial super- apps, once established, however, have high platform benefits (diverse data gathering and cross sell) as compared to Policybazaar that will constrain in the insurance space. Similar to large consumer digital companies, Policybazaar is increasing its offline presence gradually morphing to be an omnichannel B2B2BC player. However, the business, similar to fintechs, remains more exposed to regulatory risks than digital consumer companies.
PB Fintech’s insurance business is well placed to deliver high multi-year growth (35% premium CAGR during FY2022-26E). The company’s digital business is booming at a higher pace as well as offline businesses that help expand its product bouquet with long-trail earning policies. Improving contribution margin and operating leverage will likely drive strong long-term earnings. High multi- year growth, leading to consistent market share gains, will likely improve unit economics and drive operating leverage over time. Its diversifying product mix, aided by increasing distribution channels, will help gather trail commissions – a key driver of its profitability.
Policybazaar- A strong player in online insurance market:
Policybazaar’s dominant position (90% market share) in the online insurance marketplace is driven by (1) its pioneering market position, industry first offerings, large brand investments translating into strong brand recall, (2) a robust technological backbone, and (3) use of rich customer insights to improve claims experience for its insurance partners and develop customized products. Our expectation of high multi-year growth for Policybazaar builds in significant market share gains in the low-penetrated traditional savings and fast-growing health businesses. A vibrant offline channel, through POSPs or company operated branches, is crucial for success in these high-engagement products.
New Initiative for EBIDTA:
PB Fintech’s strong revenue growth, 35% CAGR over FY2022-26E, builds in high premium growth and lower (28%) growth at Paisabazaar (~14% of PB Fintech’s revenue). We expect a marginal increase in overall commission yields on the back of a shift in focus to high-commission products, but constrained somewhat by low-yielding but highly-profitable renewals. Despite the near-term drag of offline and POSP, we expect PB Fintech to report EBITDA breakeven by FY2025E and turn positive by FY2026E.
Key Risks:
Key risks to PB Fintech’s businesses include
Our positive stance on PB Fintech is driven by the following multi-year growth in Indian insurance sector, high growth potential in online insurance space (current penetration at just ~1%), Policybazaar’s strong market position (~65%) in the online insurance space and its constantly evolving business model provide conviction on its execution capabilities. Adding offline business will augment high multi-year growth for PB Fintech. A high LTV/CAC ratio of the insurance distribution business driven by long-tailed renewal premiums reflects high inherent profitability.
High growth in the underpenetrated insurance market:
India premium/GDP at 4.2% (12% in the US, 4.5% in China), high mortality protection gap of 83% (48% in the US, 70% in China) and absence of non-life insurance coverage for 72.3% of the population (10.9% in the US, 35% in China) provide immense long-term potential for Indian insurance sector. We expect the insurance sector to deliver 14% premium CAGR during FY2023-35E on the back of 10-11% growth in nominal GDP.
Strong position in online insurance will drive high multi-year growth for Policybazaar:
It is expected that Policybazaar will deliver 33% premium CAGR during FY2022- 30E and 19% from FY2030-35E, capitalizing its unique position in the insurance space. Even after a prolonged period of higher-than-market growth, Policybazaar will have a market share of 3.5% in overall premiums by 2035E, from 0.8% in FY2022.
High growth in online insurance:
Online insurance in India is ~1% of premium as compared to 5.5% in China and 13.3% in the US – this provides immense headroom as digital adoption increases.
A dominant player in online insurance:
Policybazaar has a first-mover advantage in the online insurance distribution sales landscape and commands a dominant ~65% market share in overall online insurance sales (including proprietary digital platforms of individual insurance companies) in CY2020; the company reported 90% market share in marketplaces in FY2021. Policybazaar’s strong brand recall (>80% of the customers come directly to the platform) augments strong customer footprint on the website (monthly run-rate of website traffic at ~10-11 mn is 50% of the overall website traffic commanded by all private life insurers).
An evolving Player:
Policybazaar has evolved over the years from being a price comparison website for motor insurance to offer a diversified bouquet across motor, term and even more complex health and non-linked savings. The company is now adding the offline business with POSPs and company-owned branches. This will increase the addressable market and supplement the digital engine apart from better customer servicing and claims management. Its omni-channel diversified product offering will likely support its market dominance even as disruptive pressure has intensified from aggregators (e-commerce, payment platforms, etc.) and other insuretech start-ups (example, Turtlemint, Coverfox, RenewBuy, etc.)
We expect Policybazaar’s market share to moderate in the overall online business due to pickup in business of digital only insurers and strong sales push from third-party insurance aggregator distributors (example, PayTm, PhonePe, etc.) even as new players help expand the market. Offline expansion is targeted at increasing conversion rates and sales of health and high- ticket non-linked traditional savings policies. Customers may be willing to commit for higher tickets on having face-to-face conversations; the typical ticket size for private sector life insurance companies was Rs60,000 to Rs100,000 versus Rs6,500 for Policybazaar.
Policybazaar’s platform has large, efficient and intelligent networks, providing consumers with the ability to browse financial services products offered by multiple insurer partners. Its large and growing number of visitors attracts more insurers who offer more products, which in turn further attracts more consumers, creating a virtuous cycle; with every new consumer and insurer, the data insights and intelligence of the network continues to improve. Policybazaar helps deliver superior underwriting (better persistency, lower mortality, lower claims ratio, etc.) and even increase adoption of underdeveloped market segments (example, Policybazaar was pioneer in developing the online term insurance market). While anecdotal evidence suggests that Policybazaar has helped insurance manufacturers in delivering better quality business, it is yet to be ascertained by third parties/data disclosures (example, reinsurance companies).
Consumer digital and fintech companies benefit from repeat transaction users, which provides them high long-term customer value (LTV). While Policybazaar has low cross-sell, the company benefits from high trail commission while acquisition spends are mostly upfront (explained in detail at the end of this section).
Growth Prospects of Policy Bazaar:
Policybazaar had broadly similar premium mix across life and non-life insurance as of FY2020. The company has gradually diversified its product offering over the past few years and the share of term insurance and motor insurance has moderated a bit. We expect non-linked traditional savings and health insurance to be primary growth drivers over the next few years. Strong pace of new customer acquisitions led by robust demand and gradually increasing share of renewal mix will support growth.
Policybazaar’s highly successful web platform is augmented by tele-advisors that help customers to make a purchase decisions; this is crucial in products like health and savings that involve product complexities. While 80% of new policies sold through the platform in FY2021 did not require significant human assistance (55% in motor and 99% in two-wheelers), we expect share of assisted sales to gradually inch up (~23.5% in 1QFY22 compared to ~19.6% in FY2021) as share of complex products (health, non-linked traditional savings) increase in overall new business policy mix.
The company’s international footprint is small for now though it has begun to expand operations in the Middle East (operational in Dubai). Expansion plans are currently underway in the broader Gulf Cooperation Council (GCC). The international subsidiary reported a loss of Rs95 mn in FY2021. The overall addressable market opportunity in GCC region, however, remains lower than the domestic counterpart. The company may pursue similar opportunities in select Southeast Asian countries by replicating business model operational in India alongside exploring inorganic growth opportunities.
PolicyBazaar Planning for offline channel:
Policybazaar plans to expand its digital operations by supplementing offline channels to its dominant digital presence and tele-advisors; this is facilitated by the new broker license. Offline channels will focus on providing in- person consumer engagement and services in local languages through physical retail outlets and POSPs (point-of-sale persons). These outlets will increase penetration in smaller cities with a low digital footprint and increase brand presence. The network of POSPs across select micro-markets target specific customer cohorts and sell select products suited to the needs of the customer.
Policybazaar’s platform provides consumers the ability to browse through financial services products offered by about 50 insurer partners. The company offers an information-rich, user-friendly, and tech-driven self-service platform for pre-purchase research, purchase, including application, inspection, medical check-up and payment and post- purchase policy management, including claims facilitation, renewals, cancellations and refunds. Among other things, customers benefit from a plethora of product choices on one single platform, lower turnaround time (industry is process driven and can have lengthy processing times; technology integration with insurers and large base of advisors increases customer convenience on Policybazaar), seamless transactions (payments tend to be faster and more secured than traditional alternatives, pre-purchase research time is minimized, etc.) and operational support (documentation and follow-ups, nudge at the time of renewals, customer servicing, claims management, etc.).
Policybazaar’s high premium growth assumptions capture strong pickup in POSP and offline insurance sales (~26% of overall premiums by POSP/offline channel by FY2025E). Essentially, we expect strong pickup in sales of relatively more complex health and non-linked traditional savings policies through offline channel. As highlighted, non-linked traditional savings are more complex product that can be facilitated by offline sales and remain an important part of Policybazaar’s strategy to deliver multi-year growth. For now, POSP are focused in sale of health and motor business. Investment in business expansion will remain high, dragging overall profitability. Under such circumstances, high growth and corresponding breakeven assumptions of the offline business hinges on effective execution of the offline ecosystem. The offline insurance distribution model is fragmented with multiple brokers, individual agents, bank branches, etc. While the online platform acted as a ‘pull’ strategy (>80% customer were sourced directly) due to high brand recall, customer footprint in the offline channel will be an interplay of referral from online channel, POSP reach and organic footfall.
Financials:
Conclusion:
PB Fintech’s insurance business is well placed to deliver high multi-year growth (39% premium CAGR during FY2022-26E). The company’s booming digital business is augmented by its point-of sales person as well as offline businesses that help expand its product bouquet with long-trail earning policies. Improving contribution margin and operating leverage will likely drive strong long-term earnings with a high upside potential of 35% from CMP (504 Rs)
I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.
I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Stocx Research Club). I have no business relationship with any company whose stock is mentioned in this article.
I am not a SEBI Registered individual/entity and the above research article is only for educational purpose and is never intended as trading/investment advice.
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Shreyansh
